TOFB Tofutti Brands Inc (QB)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying financial statements.

The discussion and analysis which follows in this Quarterly Report and in other reports and documents and in oral statements made on our behalf by our management and others may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results. These include statements regarding our earnings, projected growth and forecasts, and similar matters which are not historical facts. We remind stockholders that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors which could cause the actual future events or results to differ materially from those described in the forward-looking statements. These uncertainties and other factors include, among other things, business conditions in the food industry and general economic conditions, both domestic and international; lower than expected customer orders; competitive factors; changes in product mix or distribution channels; and resource constraints encountered in developing new products. The forward-looking statements contained in this Quarterly Report and made elsewhere by or on our behalf should be considered in light of these factors.

Critical Accounting Estimates

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The policies discussed below are considered by management to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Revenue Recognition. We primarily sell vegan and dairy-free soy-based cheeses, frozen desserts and other food products. We recognize revenue when control over the products transfers to our customers, deemed to be the performance obligation, which generally occurs when the product is shipped or picked up from one of our distribution locations by the customer. We account for product shipping, handling and insurance as fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of sales. Revenues are recorded net of trade and sales incentives and estimated product returns. Known or expected pricing or revenue adjustments, such as trade discounts, rebates or returns, are estimated at the time of sale. We base these estimates of expected amounts principally on historical utilization and redemption rates. Estimates that affect revenue, such as trade incentives and product returns, are monitored and adjusted each period until the incentives or product returns are realized.

Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration. As such, we do not capitalize contract inception costs and we capitalize product fulfillment costs in accordance with U.S. GAAP and our inventory policies. We generally do not have any unbilled receivables at the end of a period.

Accounts Receivable. The majority of our accounts receivables are due from distributors (domestic and international) and retailers. Credit is extended based on evaluation of a customers’ financial condition and, generally, collateral is not required. Accounts receivable are most often due within 30 to 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts and reserve for sales promotions. Accounts outstanding longer than the contractual payment terms are considered past due. We determine whether an allowance is necessary by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the bad debt expense account. We do not accrue interest on accounts receivable past due.

Inventory. Inventory is stated at lower of cost or net realizable value determined by first in first out (FIFO) method. Inventories in excess of future demand are written down and charged to the provision for inventories. At the point of which loss is recognized, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in the newly established cost basis.

Leases. Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. We have operating leases primarily consisting of facilities with remaining lease terms of approximately one to three years. Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, we have combined the lease and non-lease components in determining the lease liabilities and right of use assets.

Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded if there is uncertainty as to the realization of deferred tax assets. We will recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes.

Recent Developments

An outbreak of an infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and has now spread globally. This outbreak has resulted in travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, prolonged quarantines, order cancellations, supply chain disruptions, increased costs for raw materials, and lower consumer demand, and other significant economic impacts, as well as general concern and uncertainty.

The severity of the pandemic and the uncertainty regarding the length of its effects could have negative consequences for our company. To date, the effects of the pandemic have affected certain aspects of our operations. All of our co-packing facilities are currently operating normally, and the pandemic has not constrained any of our production requirements. The cost of certain key ingredients and packaging has increased substantially due to short-term supply issues related to COVID-19. Additionally, we are currently experiencing longer lead times in receiving certain ingredients and packaging. We anticipate that these longer lead times will persist for the balance of 2022. We continue to be able to schedule trucks for delivery and a large majority of our customers are still operating and ordering our products as before. Additionally, our freight costs have increased substantially due to a driver shortage caused by COVID-19 and a significant increase in fuel costs. In response to these cost increases and the potential for additional cost increases affecting various aspects of our operations, we have initiated a series of sales price increases commencing in the fourth quarter of 2021 and continuing into the first quarter of 2022 to help offset these cost increases.

Our ability to handle customer and consumer communications, schedule production, and order ingredients necessary for our production has not been materially impacted. Nor have we experienced a significant change in the timeliness of payments of our invoices and our cash position of approximately $2,075,000 as of May 9, 2022 has improved since our fiscal year end January 1, 2022.

Results of Operations

Thirteen Weeks Ended April 2, 2022 Compared with Thirteen Weeks Ended April 3, 2021

Net sales for the thirteen weeks ended April 2, 2022 increased by $313,000, or 10%, to $3,463,000, from net sales of $3,150,000 for the thirteen weeks ended April 3, 2021. Sales of our vegan cheese products increased to $2,916,000 in the 2022 period from $2,720,000 in the 2021 period. Sales of our frozen dessert and frozen food products, which consist primarily of frozen dessert products, increased to $547,000 in the thirteen weeks ended April 2, 2022 from $430,000 for the thirteen weeks ended April 3, 2021. We anticipate an increase in sales dollars over the balance of the current fiscal year as our prices increases take full effect.

Our gross profit decreased to $857,000 in the period ended April 2, 2022 from $1,001,000 in the period ended April 3, 2021. Our gross profit percentage was 25% for the period ending April 2, 2022 compared to 32% for the period ending April 3, 2021. The decrease in both our gross profit and gross profit percentage were caused by the substantial increases in certain ingredients and freight expense.

Freight out expense, a significant part of our cost of sales, increased by $91,000, or 40%, to $318,000 for the thirteen weeks ended April 2, 2022 compared with $227,000 for the thirteen weeks April 3, 2021. Freight out expense was 9% of sales for the thirteen weeks ended April 2, 2022 compared to 7% of sales for the thirteen weeks ended April 3, 2021. The increase in freight out expenses was due to the increase in sales, but primarily due to the increases in shipping costs due to the large increase in the cost of fuel and the unavailability of trucks. We anticipate that our freight out expense will continue at the current higher rate for the balance of 2022.

Selling expenses decreased by $59,000, or 18%, to $264,000 for the thirteen weeks ended April 2, 2022 from $323,000 for the thirteen weeks ended April 3, 2021. This decrease was primarily attributable to decreases in payroll expense of $18,000, outside warehouse rental expense of $17,000, and commission expense of $22,000. We anticipate our selling expenses for 2022 will remain below the level of selling expenses in 2021. The decrease in commission expense is due to lower cash collections in the current period. Commissions to our brokers are paid upon cash receipts. The reduction in payroll expense was due to one less employee in sales in the current period.

Marketing expenses increased by $86,000, or 123%, to $156,000 for the thirteen weeks ended April 2, 2022 from $70,000 for the thirteen weeks ended April 3, 2021. The increase was primarily due to increases in promotions expense of $55,000, artwork and plates expense of $19,000, and advertising expense of $9,000, We anticipate that our marketing expenses for the balance of the year will be lower than the first quarter of 2022, as the increase in promotion expense during the first quarter was a one time event.

Product development costs, which consist principally of salary expenses and laboratory costs, increased by $1,000, or 3%, to $40,000 for the thirteen weeks ended April 2, 2022 from $39,000 for the thirteen weeks ended April 3, 2021.

General and administrative expenses decreased by $110,000, or 25%, to $337,000 for the thirteen weeks ended April 2, 2022 from $447,000 for the thirteen weeks ended April 3, 2021, primarily due to decreases in payroll expense of 103,000, travel, entertainment and auto expenses of $12,000, and professional fees and outside services expense of $15,000, which were partially offset by an increase in public relations expense of $30,000. The decrease in payroll expense was due to no salary being paid to Mr. Mintz this period compared to the same period in the prior year.

Income tax expense was $20,000 for the thirteen weeks ended April 2, 2022 and $36,000 for the thirteen weeks ended April 3, 2021 resulting from the lower taxable income during the thirteen weeks ended April 2, 2022 compared to the thirteen weeks ended April 3, 2021.

Liquidity and Capital Resources

As of April 2, 2022, we had approximately $1,589,000 in cash and our working capital was approximately $4,551,000, compared with approximately $1,698,000 in cash and working capital of $4,326,000 at January 1, 2022.

In order to provide our company with additional working capital, on January 6, 2016, David Mintz, our former Chairman and Chief Executive Officer, provided our company with a convertible loan of $500,000. On December 22, 2021, the loan balance of $500,000 plus accrued interest of $25,000 was paid by the Company to Mr. Mintz’s estate.

The following table summarizes our cash flows for the periods presented:

Net cash used in operating activities for the thirteen weeks ended April 2, 2022 was $109,000 compared to $987,000 provided by operating activities for the thirteen weeks ended April 3, 2021. Net cash used in operating activities for the thirteen weeks ended April 2, 2022 was primarily a result of SBA loan forgiveness of $165,000, an increase in accounts receivable of $81,000 and an increase in inventories of $538,000, offset by our net income of $205,000, an increase in accounts payable and accrued expenses of $384,000, an increase in income taxes payable of $16,000, and a decrease in prepaid expenses and other current assets of $53,000.

We believe our existing cash on hand at April 2, 2022, existing working capital and the cash flows expected from operations, will be sufficient to support our operating and capital requirements during the next twelve months.

Inflation and Seasonality

We do not believe that our operating results have been materially affected by inflation during the preceding two years. There can be no assurance, however, that our operating results will not be affected by inflation in the future. Our business is subject to minimal seasonal variations with slightly increased sales historically in the second and third quarters of the fiscal year. We expect to continue to experience slightly higher sales in the second and third quarters, and slightly lower sales in the fourth and first quarters, as a result of reduced sales of dairy free frozen desserts during those periods.

Off-balance Sheet Arrangements

None.

Contractual Obligations

We had no material contractual obligations as of April 2, 2022.

Recently Issued Accounting Standards

See Note 2 to the unaudited condensed financial statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.